SMIC (0981.HK)_ 2Q preview_ Utilization, ASP, capex, and 2H demand outlook as key focuses; Neutral(1)

SMIC will report on Aug 11 after-market. We model 2Q revenue growth at +2% QoQ/+40% YoY and GM at 38.4% (vs. 40.7% in 1Q22), in-line with company guidance. Key focuses of the earnings call will be utilization and ASP trend, 2H demand outlook, as well as latest capex plan amid market demand weakness. In coming quarters, we expect SMIC’s capacity utilization to decline in 3Q-4Q22E given weak demand for smartphones and consumer electronics. We model SMIC’s revenue growth to slow down from +40%/+29% YoY in 2Q-3Q22E to +10%/-6%/+6% in 4Q22-2Q23E. With lower revenue scale, lower utilization, and higher depreciation costs, we also expect margins to decline in coming quarters. We have a Neutral rating with a HK$20.2 TP. We expect 2Q revenue and GM to be in-line with guidance: We model 2Q revenue at US$1.9bn (+2% QOQ, +40% YoY), and GM at 38.4% (vs. 40.7% in 1Q22, 30.1% in 2Q21), which are in-line with company guidance (revenue up 1~3% QoQ, GM at 37~39%). We estimate operating profit at US$541m (+1% QoQ, +1% YoY), and net profit at US$459m (+3% QoQ, -33% YoY). The slower operating profit and net profit growth on YoY is mainly due to a disposal gain of US$231m in 2Q21 (booked as other operating income). If excluding the disposal gain in 1Q21, 2Q22E operating profit should grow +77% YoY. 3Q/4Q outlook - lower utilization and margins: We expect revenue growth to slow down from +40% YoY in 2Q22E to +29%/+10% YoY in 3Q/4Q22E, and utilization rate to decline from 94% to 90%/80% in the same period. With lower utilization and higher depreciation cost, we model GM decline from 38.4% in 2Q22E to 34.7%/29.2% in 3Q/4Q22E. We also expect wafer ASP to decline by 1%/3% in 3Q/4Q22E. The weakness is mainly due to SMIC’s high exposure to smartphone and consumer electronics (~50% of revenue), in which fabless customers are digesting inventory and end-demand remains weak in the near-term. By products, SMIC has exposure to NOR flash, CIS, display driver IC, WiFi, Bluetooth, consumer SoC, where we expect demand to be weak in 3Q/4Q22E. We model capex to decline 12% YoY in 2023E: We expect SMIC to maintain its 2022 capex plan of US$5bn as the equipment are booked last year/early-2022 and some of the capex budget this year is for building construction of new fabs. Recall that SMIC has announced three new 12” fabs in Beijing, Shanghai, and Shenzhen, Allen Chang +852-2978-2930 | allen.k.chang@gs.com Goldman Sachs (Asia) L.L.C. Lynn Luo +886(2)2730-4244 lynn.luo@gs.com | Goldman Sachs (Asia) L.L.C., Taipei Branch Ting Song +852-2978-6466 ting.song@gs.com | Goldman Sachs (Asia) L.L.C.SMIC (0981.HK): 2Q preview: Utilization, ASP, capex, and 2H demand outlook as key focuses; Neutral5 August 2022 | 2:13AM HKT Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single facto